How to model in a mezzanine loan when you’re in a hurry

Let’s say you are modeling an acquisition transaction and want to quickly compare how two debt financing alternatives impact cash flows:

1. a senior amortizing loan only
2. a senior amortizing loan and a mezzanine interest-only loan

If you don’t already have a mezzanine loan layer built into your model’s capital structure and debt service sections, do you need to build it in fully to be able to see the impact of the mezz piece on cash flows? No sir.

Here’s what you do:

1. Calculate the annual interest-only payment on the proposed mezz debt (multiply the principal amount by the annual interest rate)
2. Add this annual payment dollar amount to the annual constant payment dollar amount of the amortizing loan in alternative #2 to get a total Combined Payment
3. Run this Combined Payment amount out on a constant basis in your Debt Service line for the duration of the transaction
4. Inspect your operating cash flow line to see the impact of the new debt service obligation
5. To see the impact on Levered Cash Flow, be sure to include the funding and repayment of the mezz loan as positive and negative adjustments, respectively, to the net equity cash flow after financing costs line.
6. Calculate your cash-on-cash return from your updated levered cash flow line, being sure to reflect any reduced equity requirement in your equity amount denominator due to the inclusion of the mezz loan.

If you decide to integrate the mezz loan into the model, you can then break out the financing accordingly.